Europe's innovation woes deepen

Philips, the Dutch electronics group, underscored on Monday the harsh prospects for European industry by cutting 4 500 jobs as part of an €800-million savings programme.

The European Commission on Tuesday also released a report indicating that European Union industrial firms lagged behind United States and Asian competitors in research and innovation.

Máire Geoghegan-Quinn, commissioner for research, innovation and science, said: “We are facing an innovation emergency. We need much more innovation in Europe and we need it fast, otherwise we risk being left behind in the global research and development race.”

Germany’s central bank added to the sense of crisis in the real economy by forecasting a cold winter for manufacturing as orders for German firms from outside the EU are set to dwindle.
It said in its monthly report that economic prospects had darkened.

Philips is Europe’s largest consumer electronics firm and a global leader in lighting, but it reported an 85% decline in third-quarter net profit to €74-million, from €524-million a year earlier. Sales were down 1.3% to €5.39-billion.

Frans van Houten, chief executive, said: “We are not yet satisfied with our current financial performance, given the ongoing economic challenges, especially in Europe, and operational issues and risks. We do not expect to realise a material performance improvement in the near term.”

He said the 4 500 job losses, including 1 400 in the Netherlands, were “a regrettable but inevitable step to improve our operating model to become more agile, lean and competitive” and would provide 60% of the €800-million planned savings. Much of this, he suggested, would be reinvested in innovation.

Philips highlighted the relative decline of European industry by showing falling earnings at its two main divisions for higher growth—lighting and healthcare. Operating profit at the former almost halved to €110-million and fell at the latter from €282-million to €261-million.

It no longer even counts the television business as a continuing operation because it is trying to dispose of 70% of it in a joint venture with China’s TPV. But negotiations to offload the TV business were taking longer than expected, it said.

Van Houten reiterated commitments to 3% to 4% sales growth and 10% to 12% operating margins by mid-2013, but admitted that the company had a long way to go. It made a net loss of €1.3-billion in the second quarter, issued two profit warnings in seven months and is losing market share to low-cost Asian rivals. Its shares, down almost 40% this year, fell a further 2% in Amsterdam on Monday.

The latest EU “research and development investment scoreboard” showed that European companies’ investment in innovation was up 6.1% in 2010. But that of US firms was up 10%, whereas Chinese firms’ investment went up 29.5%. Global research and development ­investment went up 4% last year after falling 1.9% in 2009.

Fifteen European companies figure in the first 50 globally, with Swiss pharmaceutical firm Roche in top spot, followed by its US rival, Pfizer. Only two British companies—GlaxoSmithKline (16th) and AstraZeneca (29th) - made it into the top 50. More than two-thirds of EU research and development investment comes from Germany, the UK and France, with German firms, led by car-makers, showing the highest growth (8.1%) and UK companies (5.8%) outperforming French ones (3.8%).

The EU scoreboard showed signs of recovery in 2010, but Geoghegan-Quinn said the fact that firms were still lagging behind competitors showed conditions for business had to improve further.

The EU has a long-standing target for investment in innovation of 3% of gross domestic product.

As the economic prospects darken, some car-makers are cutting back production and overtime at their European plants in the current quarter. Germany’s Bundesbank said manufacturing would be hit hard by significantly weakened demand.—